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Cablegate: Ecuador Economic News: Chevron Files for Abritration, Plan

VZCZCXYZ0001
RR RUEHWEB

DE RUEHQT #0938/01 2711417
ZNR UUUUU ZZH
R 281416Z SEP 09
FM AMEMBASSY QUITO
TO RUEHC/SECSTATE WASHDC 0122
INFO RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHBO/AMEMBASSY BOGOTA
RUEHCV/AMEMBASSY CARACAS 0031
RUEHGL/AMCONSUL GUAYAQUIL
RUEHLP/AMEMBASSY LA PAZ SEP LIMA 0036

UNCLAS QUITO 000938

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON ETRD EINV EFIN EC
SUBJECT: ECUADOR ECONOMIC NEWS: CHEVRON FILES FOR ABRITRATION, PLAN
TO INCREASE MINIMUM WAGE, US$1 BILLION IN "NEW" RESERVES, MOODY'S
UPGRADES GOE CREDIT RATING

REF: A) QUITO 795; B) QUITO 816

1. (U) The following is a periodic economic update for Ecuador that
reports notable developments that are not reported by individual
cables. This document is sensitive but unclassified. It should
not be disseminated outside of USG channels and should not be
posted on the internet.

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Highlights

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- Chevron Files for International Arbitration

- Criticism of Concessions Granted to Foreign State Enterprises

- Increase in Minimum Wage for Private Sector Employees

- National Assembly Ratifies GoE Control over Central Bank

- US$1 billion in Central Bank Pensions Claimed as Reserves

- Rating Agencies upgrade Ecuador's credit rating

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Chevron Files for International Arbitration

-------------------------------------------

2. (U) On September 23, Chevron filed an international arbitration
claim against the government of Ecuador (GoE) before the Permanent
Court of Arbitration in The Hague under the rules of the United
Nations Commission on International Trade Law. Chevron claims
Ecuador violated investment agreements, international law, and the
terms of the U.S.-Ecuador Bilateral Investment Treaty, in
particular by failing to provide fair and equitable treatment for
U.S. investors.

3. (U) On the same day, an Ecuadorian court ruled that Judge Juan
Nunez, the presiding judge in the $27 billion lawsuit pending
against Chevron/Texaco in Ecuador, would not be removed from the
case despite the judge's September 4 recusal request (Ref A).
Nunez had sought to recuse himself from the trial after Chevron
disclosed tapes implicating Nunez in a $3 million bribery scheme.
Nunez has denied the allegations of bribery.

4. (U) Texaco, purchased by Chevron in 2001, had operated a
concession in the Amazon region of Ecuador with state-owned oil
company Petroecuador from 1964-1992. Chevron is seeking
enforcement of settlement and release agreements the GoE signed
with Texaco 1994 to 1998 absolving Texaco of further liability
after it had completed certain remediation efforts. In support of
its claims, Chevron cited in its September 23 press release
statements in the Department's Investment Climate Report for
Ecuador, such as, "Systemic weakness and susceptibility to
political or economic pressures in the rule of law constitute the
most important problem faced by U.S. companies investing in or
trading with Ecuador" and that "Corruption is a serious problem in
Ecuador."

--------------------------------------------- ----------------

Criticism of Concessions Granted to Foreign State Enterprises

--------------------------------------------- ----------------

5. (SBU) The GoE has granted concessions on key projects in the
petroleum and energy sectors to foreign state enterprises.
Analysts have criticized the concessions claiming they were not
open to competitive bidding and that the provisions of the
contracts are not beneficial to Ecuador.

6. (SBU) In early September, China's Sinohydro was awarded a
US$1.98 billion contract for construction of the Coca Codo Sinclair
hydroelectric plant, the largest construction project in the
nation's history. The plant will generate 1,500 megawatts of
energy to be supplied to up to 75% of the country. A delegation
from China's Ex-Im Bank arrived September 14 to initiate
negotiation of the credit conditions for the project. The GoE
expects eventually to obtain credit sufficient to cover 85% of the
cost of the project with a repayment period of 10 years and a
five-year grace period. After a meeting in Argentina on August 31,
the GoE reportedly decided that the company Energia Argentina SA
(Enarsa) did not have sufficient capital to continue its 30%
participation in the Coca Codo Sinclair Project. Ecuador's
Termopichincha holds 70% of the project's shares, and the GoE has
announced plans to purchase the remaining 30% held by Enarsa.

7. (SBU) In the petroleum sector, the production rights for the
Sacha petroleum block were awarded on September 3 to the newly
formed mixed company Rio Napo, a joint company between Petroecuador
(70%) and Petroleos de Venezuela (Pdvsa) (30%). The Sacha block is
regarded as the most important in the country, producing close to
49,800 barrels per day. The contract was awarded despite a July 6
report by a high-level technical group from Petroproduccion -- the
production arm of Petroecuador -- which concluded that the contract
signed by Rio Napo contravenes the legal framework covering
Petroecuador's activities and the country's constitution.

8. (SBU) The crux of the legal problem identified by this group
appears to be the lack of a strategic alliance agreement between
Petroecuador and Pdvsa. Other analysts are critical of the
contract because Pdvsa is only expected to invest 30% of the US$651
million in needed investment over ten years to raise production to
70,000 barrels per day and stave off the 4% natural decline in
production that would occur without any new investment. Analysts
doubt Petroecuador's ability to supply the remaining funds for the
necessary investment, although the Minister of Nonrenewable Natural
Resources (previously known as Minister of Mines and Energy) claims
Petroecuador has approved US$51.17 million of investments in the
Sacha field this year.

--------------------------------------------- --------

Increase in Minimum Wage for Private Sector Employees

--------------------------------------------- --------

9. (SBU) On August 15, President Correa announced that his
government will set a new minimum wage. Correa said no company
will be able to take profits unless all workers have received a
"dignified wage," which would now be set at US$320 per month
compared to the current minimum wage of US$218 per month. The GoE
claims the new minimum wage will not result in an increase in
unemployment and will enable families to cover their basic needs,
estimated at US$519 for a household of four members, based on a
factor of 1.6 people in the family earning a salary. Businesses
contend that with benefits, such as the mandatory payment of a 13th
and 14th month salary, the current minimum wage is actually close
to US$270 per month and that an increase of only about 20% would


provide a family with enough funds to cover basic needs. Richard
Espinoza, Minister of Labor Relations, also announced that in two
months the GOE will present an additional plan to increase wages
more generally. Private sector representatives have told Post that
they strongly disagree with the GoE's claim that the wage increase
will not increase unemployment, and predict that entire sectors -
such as cut flowers - could become uncompetitive.

--------------------------------------------- -----------

National Assembly Ratifies GoE Control over Central Bank

--------------------------------------------- -----------

10. (U) On September 22, the National Assembly approved a change
to the Monetary Regime Law, which redefines the role and structure
of the Central Bank (CBE), officially reducing its independence.
Under the new law, the CBE Board will be comprised of a
Presidential delegate and five members of the GoE's economic team.
In its new capacity, the CBE's economic policies will be subject to
approval by the Executive. To a certain extent, this law
formalizes the level of control the GoE had already been exercising
over the CBE.

--------------------------------------------- ------------

US$1 billion in Central Bank Pensions Claimed as Reserves

--------------------------------------------- ------------

11. (U) On September 18, during a radio interview, Minister of
Finance Maria Elsa Viteri reported that the GOE's Technical
Secretary for Transparency has determined that figures for the
Treasury's unified account (held at the CBE) had heretofore not
registered over US$1 billion associated with the pension fund of
Central Bank employees. Viteri, a member of the CBE Board under
the new Monetary Regime Law, announced that these funds will now be
counted as part of the GOE's resources. No other government
authorities have commented about this issue.

12. (U) The CBE currently registers cash balances of about US$1
billion, of which only US$131 million correspond to the CBE's
employees' pension fund and are deposited in the Latin American
Reserves Fund (FLAR), an international organization only allowed to
receive public sector deposits. The $1 billion in cash balances
also includes US$640 million in accounting gains for the valuation
of gold reserve assets and US$230 million in cash balances for the
operation of the CBE. These balances are currently registered on
the CBE's balance sheet as its own assets and liabilities, and are
not counted as Gross International Reserves.

13. (SBU) The motivation behind the Minister's statement is
unclear, although it is likely connected to the GoE's previous
announcement to redirect US$1.6 billion of reserves towards
domestic investments (Ref B). Although accounting for these
balances as reserves rather than the CBE's own assets/liabilities
has no impact on the CBE's overall balance sheet or CBE capital
levels, it may give the public impression that reserves are
healthier than previously thought. Nevertheless, the reality is
that any GoE attempt to use reserves or other CBE assets for
domestic investment purposes would undermine the CBE's financial
situation.

--------------------------------------------- --

Rating Agencies upgrade Ecuador's credit rating

--------------------------------------------- --

14. (U) Moody's rating agency announced September 24 that it had
upgraded its GoE global bond rating to Caa3, with stable outlook,
from Ca with a developing outlook. Moody's raised the rating on
Ecuador's defaulted bonds to C, from D, "reflecting recovery rates
of around 35% for investors." This action follows Fitch Ratings
decision in early September to upgrade Ecuador's "Long Term Issuer
Default Rating" to CCC from Restricted Default (RD), which it was
rated at the time of the GoE's announcement that it would stop
servicing a portion of its external bond debt in December 2008.
For both Moody's and Fitch, the new ratings are near the bottom of
"speculative grade," and well below investment grade, despite
Ecuador's very low post-default sovereign debt load. Moody's
judges obligations rated Caa as of "poor standing and subject to
very high credit risk," while Fitch considers CCC rated sovereign
issuances as "highly vulnerable, very speculative bonds."

15. (U) These rating upgrades do not, to quote Goldman Sachs,
"reflect an improvement in intrinsic creditworthiness but simply
the fact that the politically motivated default and subsequent
distressed buyback contributed to lower the external debt load and
through it the probability that another credit event will take
place." In its press release, Moody's highlights Ecuador's "poor
track record of debt payment...and frequent statements about
prioritizing social and other expenditures over debt payment,"
which suggests the risk of default on still outstanding bonds
remains high.

16. (U) Moody's adds that "the Correa administration does not view
debt service as a policy priority," and comments that incorporated
in the rating, "the third-lowest on Moody's scale," are "concerns
about Ecuador's ability to pay, related primarily to the
sustainability of dollarization." "A loose fiscal policy, the lack
of fiscal stabilization funds, limited access to market financing,
and deposit flight could easily lead to a shortage of liquidity,"
and, "Ecuador's contentious approach towards foreign investment in
the oil industry could, in the long-term, not only limit capital
inflows but also hinder oil output, a vital contributor to
Ecuador's economic growth."
CHRITTON

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